Friday, September 24, 2010

Following absolutely true to the script of The Fourth Turning (see www.fourthturning.com), namely that we are at the end of the saeculum, and the social contract is breaking totally apart, the Democrats have shown stupidity and cowardice in not framing the debate about the Bush tax cuts in terms of what really ails America, that it has become a banana republic run by and for the rich ruling class, who have looted American corporations and manipulated the tax system to their express benefit lo these thirty years—no, the Democrats have backed off having a vote before the elections on Obama’s eminently reasonable proposal to keep the middle class tax cuts and let those on the rich expire.

At a $70 billion annual run rate, the tax increase on the rich amounts to less than $5,000 per each of the 15 million officially unemployed persons in America. As I have suggested, the economy would get the most benefit if the increased taxes on the rich were simply transferred to the unemployed, so that they and their children do not suffer further damage.

Obama has ignored the lessons of recent electoral history, that it is the independents who decide presidential elections. He lost the independents with Afghanistan and his sycophantic bailouts of the Wall Street banks. The independents are leaning toward the Republicans, the party of keeping tax rates low on the rich, in the probably mistaken belief that the Republicans represent fiscal sanity, which Republican incumbents in the White House since Reagan most certainly have not.

Reagan sold a bill of goods to the public, who got happy on tax cuts, insisting that the tax cuts would be self-financing via “supply side economics,” which they were not. The Bushes were both budget busters, although Bush I at least tried to pay his own way. Only a Republican Congress with Clinton in the White House achieved anything resembling fiscal sanity, which is why the independents are lurching right.

The billionaire Koch brothers are bankrolling the Tea Party movement, which is likely exploit the public’s desire for fiscal sanity by cutting programs that are actuarially solvent for years to come, like Social Security (see www.angrybear.com reference, for example).

It’s a cluster, the makings of highly nonlinear adjustments in the near future.

Monday, September 20, 2010

Via: www.nyt.com Like Marx, Krugman is at his best when he leaves macroeconomics behind and just lets his good liberal heart speak its mind. Next I’d like to hear him on the connection between war and inflation.

The Angry Rich

Anger is sweeping America. True, this white-hot rage is a minority phenomenon, not something that characterizes most of our fellow citizens. But the angry minority is angry indeed, consisting of people who feel that things to which they are entitled are being taken away. And they’re out for revenge.

No, I’m not talking about the Tea Partiers. I’m talking about the rich.

These are terrible times for many people in this country. Poverty, especially acute poverty, has soared in the economic slump; millions of people have lost their homes. Young people can’t find jobs; laid-off 50-somethings fear that they’ll never work again.

Yet if you want to find real political rage — the kind of rage that makes people compare President Obama to Hitler, or accuse him of treason — you won’t find it among these suffering Americans. You’ll find it instead among the very privileged, people who don’t have to worry about losing their jobs, their homes, or their health insurance, but who are outraged, outraged, at the thought of paying modestly higher taxes.

The rage of the rich has been building ever since Mr. Obama took office. At first, however, it was largely confined to Wall Street. Thus when New York magazine published an article titled “The Wail Of the 1%,” it was talking about financial wheeler-dealers whose firms had been bailed out with taxpayer funds, but were furious at suggestions that the price of these bailouts should include temporary limits on bonuses. When the billionaire Stephen Schwarzman compared an Obama proposal to the Nazi invasion of Poland, the proposal in question would have closed a tax loophole that specifically benefits fund managers like him.

Now, however, as decision time looms for the fate of the Bush tax cuts — will top tax rates go back to Clinton-era levels? — the rage of the rich has broadened, and also in some ways changed its character.

For one thing, craziness has gone mainstream. It’s one thing when a billionaire rants at a dinner event. It’s another when Forbes magazine runs a cover story alleging that the president of the United States is deliberately trying to bring America down as part of his Kenyan, “anticolonialist” agenda, that “the U.S. is being ruled according to the dreams of a Luo tribesman of the 1950s.” When it comes to defending the interests of the rich, it seems, the normal rules of civilized (and rational) discourse no longer apply.

At the same time, self-pity among the privileged has become acceptable, even fashionable.

Tax-cut advocates used to pretend that they were mainly concerned about helping typical American families. Even tax breaks for the rich were justified in terms of trickle-down economics, the claim that lower taxes at the top would make the economy stronger for everyone.

These days, however, tax-cutters are hardly even trying to make the trickle-down case. Yes, Republicans are pushing the line that raising taxes at the top would hurt small businesses, but their hearts don’t really seem in it. Instead, it has become common to hear vehement denials that people making $400,000 or $500,000 a year are rich. I mean, look at the expenses of people in that income class — the property taxes they have to pay on their expensive houses, the cost of sending their kids to elite private schools, and so on. Why, they can barely make ends meet.

And among the undeniably rich, a belligerent sense of entitlement has taken hold: it’s their money, and they have the right to keep it. “Taxes are what we pay for civilized society,” said Oliver Wendell Holmes — but that was a long time ago.

The spectacle of high-income Americans, the world’s luckiest people, wallowing in self-pity and self-righteousness would be funny, except for one thing: they may well get their way. Never mind the $700 billion price tag for extending the high-end tax breaks: virtually all Republicans and some Democrats are rushing to the aid of the oppressed affluent.

You see, the rich are different from you and me: they have more influence. It’s partly a matter of campaign contributions, but it’s also a matter of social pressure, since politicians spend a lot of time hanging out with the wealthy. So when the rich face the prospect of paying an extra 3 or 4 percent of their income in taxes, politicians feel their pain — feel it much more acutely, it’s clear, than they feel the pain of families who are losing their jobs, their houses, and their hopes.

And when the tax fight is over, one way or another, you can be sure that the people currently defending the incomes of the elite will go back to demanding cuts in Social Security and aid to the unemployed. America must make hard choices, they’ll say; we all have to be willing to make sacrifices.

But when they say “we,” they mean “you.” Sacrifice is for the little people.

Thursday, September 16, 2010

Say Goodbye to Sunspots?

Weaklings. Without penumbrae, which can be seen in the yellow image, today's sunspots are weakening magnetically.

Credit: William Livingston/NSO

Scientists studying sunspots for the past 2 decades have concluded that the magnetic field that triggers their formation has been steadily declining. If the current trend continues, by 2016 the sun's face may become spotless and remain that way for decades—a phenomenon that in the 17th century coincided with a prolonged period of cooling on Earth.

Sunspots appear when upwellings of the sun's magnetic field trap ionized plasma—or electrically charged, superheated gas—on the surface. Normally, the gas would release its heat and sink back below the surface, but the magnetic field inhibits this process. From Earth, the relatively cool surface gas looks like a dark blemish on the sun.

Astronomers have been observing and counting sunspots since Galileo began the practice in the early 17th century. From those studies, scientists have long known that the sun goes through an 11-year cycle, in which the number of sunspots spikes during a period called the solar maximum and drops—sometimes to zero—during a time of inactivity called the solar minimum.

The last solar minimum should have ended last year, but something peculiar has been happening. Although solar minimums normally last about 16 months, the current one has stretched over 26 months—the longest in a century. One reason, according to a paper submitted to the International Astronomical Union Symposium No. 273, an online colloquium, is that the magnetic field strength of sunspots appears to be waning.

Since 1990, solar astronomers Matthew Penn and William Livingston of the National Solar Observatory in Tucson, Arizona, have been studying the magnetic strength of sunspots using a measurement called Zeeman splitting. Named after the Dutch physicist who discovered it, the splitting is the distance that appears between a pair of lines in a spectrograph of the light given off by iron atoms in the sun’s atmosphere. The wider the splitting, the greater the intensity of the magnetic field that created it. After examining the Zeeman splitting of 1500 sunspots, Penn and Livingston conclude that the average magnetic field strength of sunspots has declined from about 2700 gauss—the average strength of Earth's field is less than 1 gauss—to about 2000 gauss. The reasons for the decrease are not clearly understood, but if the trend continues, sunspot field strength will drop to 1500 gauss by as early as 2016. Because 1500 gauss is the minimum required to produce sunspots, Livingston says, at that level they would no longer be possible.

The phenomenon has happened before. Sunspots disappeared almost entirely between 1645 and 1715 during a period called the Maunder Minimum, which coincided with decades of lower-than-normal temperatures in Europe nicknamed the Little Ice Age. But Livingston cautions that the zero-sunspot prediction could be premature. "It may not happen," he says. "Only the passage of time will tell whether the solar cycle will pick up." Still, he adds, there's no doubt that sunspots "are not very healthy right now." Instead of the robust spots surrounded by halolike zones called penumbrae, as seen during the last solar maximum (photo), most of the current crop looks "rather peaked," with few or no penumbrae.

"It is a very interesting sequence of observations," says solar physicist Scott McIntosh of the National Center for Atmospheric Research in Boulder, Colorado. The researchers "have carefully analyzed their data and the trend appears to be real," he says.

Solar physicist David Hathaway of NASA's Marshall Space Flight Center in Huntsville, Alabama, agrees but with a caveat. "It's an important paper," he says. But the sunspot magnetic field calculations don't take into account a lot of small sunspots that appeared during the last solar maximum. Those sunspots have weaker magnetic fields, which, if not included, could make the average sunspot magnetic field strength seem higher than it really was.

Tuesday, September 14, 2010

The millionaires club (the Senate) has responded quickly to John Boehner’s glimmer of sanity, suggesting he would vote for the administration’s program of tax cuts for the middle class but not for the rich, if it were the only thing on offer.

Since Reagan the Republicans have stood for not much more than keeping taxes low on rich people. With the Bushes, they got into the business of stupid wars and criminal trespass, which was a Democratic specialty until Bush I.

The president may have found his wedge issue with his proposal to let the tax cuts expire on the top 1-2 percent, and not on the middle class. In recent polls I’ve seen the public blames the Republicans more than the Dems for the economy’s ills.

I urge the Dems to ride this one hard.

The public perceives accurately that America has become a banana republic, and they are mad about issues of distributional justice after the corporate fat-cats have sent their jobs overseas while paying themselves higher and higher salaries—not to mention Wall Street’s possibly fatal raping of America in the past two years. The economy would be better off if the increased taxes on the wealthy were just given to the unemployed as transfer payments. The ruling class has grown excessively greedy. Where is their commitment to shared sacrifice? Even after the proposed increases, their marginal tax rates will be some of the lowest in history. When a member of the ruling class loses a job after ruining a company, he or she gets another one (after collecting the golden parachute).

Hari kari, also known as sepuku, is an ancient form of ritual suicide that defeated samurai, or those whose shame was 'too unbearable' would use to restore their honor in death. In sepuku, one would take a wakizashi (short sword) and dissembowel oneself. The less noise you made while doing this, the braver you were and therefore the more honorable, however this did not last long as not long after you had begun, a close friend, comrade, or enemy would put you out of your misery by cleaving your head from your shoulders in one swift blow of the katana (another japanese sword). Even though in modern times the prospect of decapitating one of your friends or relatives sounds completely against normal 'friendly' behavior, being asked to asist your friend or enemies' escape from shame was considered a great honor, as was using this as a tool to escape. This is why the in the imperialistic wars that followed Japan's modernisation post Admiral Perry's opening of it in 1853 to the west, the Japanese had no concept of the POW, as they believed that a combatant should either fight to the last breath, or if captured, die 'honorably' in ritual suicide, known as hari kari or sepuku. A good example of this ritual can be found in Tom Cruise's movie "the last samurai."

Senate GOP leaders declared on Monday that Republicans are, to a person, opposed to legislation that would extend only middle-class tax relief -- which Obama has repeatedly promised to deliver -- if Democrats follow through on plans to let tax rates rise for the wealthiest Americans. The GOP senators forcefully made their case one day after House Republican leader John Boehner suggested he might vote for Obama's plan if that ends up the only option.

Both Republicans and Democrats are using the looming expiration of Bush-era tax cuts as a defining battle in elections to determine control of Congress.

It would take numerous Democratic defectors to pass the Republicans' version -- extending all the Bush tax cuts -- or the issue could be left for a postelection congressional session if Republicans block the measure with a filibuster. Obama last week declined to say whether he would veto a bill that preserved the tax breaks for the wealthy.

On Sunday, Boehner said he would support renewing tax cuts for the middle class but not the wealthy if that was his only choice. Though Boehner was clear that he supports extending the full range of tax cuts, the White House jumped on his remarks as a possible change of heart.

But Sen. Jon Kyl of Arizona, the GOP whip, said Monday his party won't give ground.

"Just before the recess we had a meeting and we discussed this, and every Republican was absolutely supportive of the idea that there shouldn't be any increases in taxes," Kyl said.

Renewing the tax cuts for everyone would cost the government almost $4 trillion over the next decade, according to congressional analysts, who also assume that Congress won't allow the alternative minimum tax to hit millions of middle class taxpayers with eye-popping tax hikes.

With polls showing broad public anger over spiraling federal deficits, Obama wants to exclude individuals earning over $200,000 and couples making over $250,000 -- who account for $700 billion of that $4 trillion total. They represent about 3 percent of taxpayers, according to the Tax Policy Center, a Washington think tank.

"Only in Washington could someone propose a tax hike as an antidote to a recession," GOP leader Mitch McConnell of Kentucky said.

McConnell has said a bill extending the tax cuts for only low- and middle-income earners cannot pass the Senate, but he declined to reiterate that threat on Monday. Republicans control 41 seats, the minimum needed for a successful bill-killing filibuster, though McConnell spokesman Don Stewart declined to say whether all 41 Republicans would support a filibuster.

To amplify his point, McConnell on Monday introduced a bill to extend to Bush tax cuts indefinitely for all income ranges.

Some Democrats, like Sens. Kent Conrad of North Dakota, Evan Bayh of Indiana and Ben Nelson of Nebraska, are siding with Republicans against raising taxes on anyone during a fragile economic recovery.

"I don't think it makes sense to raise any federal taxes during the uncertain economy we are struggling through," Sen. Joe Lieberman, a Connecticut independent who aligns with Democrats, said Monday. "The more money we leave in private hands, the quicker our economic recovery will be. And that means I will do everything I can to make sure Congress extends the so-called Bush tax cuts for another year."

But Lieberman said he would not vote to hold up extension of the middle-class cuts to win leverage to extend those for wealthier people as well.

At issue is a year-end deadline to renew a variety of tax cuts enacted in 2001 -- when the federal government was running a surplus. They include lower rates, a $1,000 per-child tax credit, relief for married couples, and lower taxes on investments and large estates.

On Sunday, House GOP leader John Boehner said he would support renewing tax cuts for the middle class but not the wealthy if that was his only choice. Though Boehner was clear that he supports extending the full range of tax cuts, the White House jumped on his remarks as a possible change of heart.

Boehner has proposed a two-year extension of the Bush-era tax cuts, which would push the question into the 2012 presidential election. Obama has declined to say that he'd veto such a plan.

Democrats are worried that November elections could hand the GOP control of the House and perhaps the Senate. The White House and its Democratic allies hope to use the tax-cut fight to cast themselves as defenders of the middle class and Republicans as a party eager to revive the days of a still-unpopular former president, George W. Bush.

"We're going to take the next 50-some days to convince the public that's exactly what the Republicans would do -- back to the Bush policies," said White House press secretary Robert Gibbs said on NBC's "Today" show.

"We could get (tax cuts) done this week, but we're still in this wrestling match with John Boehner and Mitch McConnell about the last 2 to 3 percent" of upper-income taxpayers, Obama said Monday during a backyard town hall in a Northern Virginia suburb.

Gibbs said the middle class should not be used as a political football by Republicans maneuvering to give tax cuts to wealthy taxpayers, who he said don't need the reductions. Republicans say paring taxes for the wealthy would encourage them and the businesses they operate to create jobs.

Republicans, for their part, say that it's not just the rich who would be hit by Obama's tax hike on upper-income people. Many small businesses -- that earn about half of all small business income -- would also face the tax hike.

"No American should face a tax increase in January ... not one," said Indiana Rep. Mike Pence, the No. 3 House Republican. "We will not compromise our economy to accommodate the class warfare rhetoric of this administration."

Friday, September 10, 2010

How many times have you heard the statement, “The bottom half of the US income distribution pays no federal income taxes?” I may even have written it myself, but you hear it most from right-wingers who like to bash the lazy and stupid American worker. (Remember, your faithful correspondent is an apostate from any and all organized political parties, and therefore totally objective… if anything, I am a classical liberal, who believes that the economy fundamentally reflects a society’s values.)

The statement is true in a narrow sense, but totally false in the context of the American tax system.

Everybody who works pays about 12.4 percent out of their paycheck to Social Security, which, as almost everybody knows, is a federal income transfer program, not a savings account. Their employer pays part, totaling 12.4 percent. And, mirabile dictu, even though right-wingers love to talk about the purity and justness of flat taxes—on all income, one presumes—the payroll tax has a ceiling: income over about $106,000 is excluded!

So the main point I am making is incontrovertible: the bottom half is taxed at a 12.4 percent rate. The bottom half pays federal taxes. Period.

Should we lift the ceiling? As this piece points out, that would soak the hard-working upper middle class the most, those households between $106,000 and the top two percent level, approximately $250,000.

But that problem can be solved by lowering the rate overall and lifting the cap (and possibly lower explicit federal tax rates on the upper middle class between $106,000 and $250,000). It’s just a matter of arithmetic. There’s a ton of money at the top.

Thursday, September 9, 2010

With all the talk about renting vs. buying a house, I thought it might be worthwhile to examine borrowing to own vs. owning outright or paying down principal on a mortgage.

I’ve been trying to convince my brother of the wisdom of paying down his mortgage with the piles of cash he likes to sit on.

Married filing joint the interest deduction doesn’t really kick in until one’s total deductions exceed the standard deduction, which is about $11,000. Assume a marginal tax rate of 25 percent, which covers a household income of about $68,000 to $137,000.

If the only deductions you have are your mortgage, at a rate of 6 percent you’d have to have a principal outstanding of about $183,000 before you got the first dollar of deductibility (=11,000/.06). If you make charitable contributions or have other deductions, you will achieve deductibility with a lower principal balance.

Now that 6 percent is paid out of after-tax dollars. The equivalent before-tax return required to match that as an “investment” would be 6/(1-.25) = 8 percent with certainty.

You can’t get 8 percent with high risk nowadays, let alone with certainty.

So if you own a home and your deductions are below the standard deduction, paying down your mortgage is probably the best financial investment you can make. It’s also an investment in peace of mind. After all, your property taxes should be going down, too, so your cost of home ownership should be taking a double dip.

So when my brother tells me he has some huge amount (speaking five figures here) of cash piled up and that he’d feel poor if he paid down some of the balance on his mortgage, a balance still many times his cash balance, I tell him—

“It’s an illusion. You don’t really have that money.”

With this arithmetic and the mortgage debt of the American people—not to mention the volatility of the stock market the past couple of years—is it any wonder that funds are flowing out of retail mutual funds?

Tuesday, September 7, 2010

With all the union bashing going on—and as a private sector worker I am aghast at what public sector union members get in pay and benefits—still, it strikes me as misplaced. A relatively small percentage of the work force is unionized in historical context.

The tightest union in America is the ruling class, with its lap dog politicians and captive media, all spouting about the un-Americanism of raising taxes on those highly productive rich people, even as CEOs and Wall Street executives take greater and greater multiples—hundreds of times—of the median family income home in pay each year, because they and their board friends say they’re worth it. They weren’t worth it thirty years ago, when the spirit of shared sacrifice of World War II still lived in the hearts of the ruling class, and CEOs worked for 30 times the median family income.

And the tightest union is international. As capital moves, so do they and their minions, ready to bash labor wherever it has the temerity to protest (except perhaps in China, where the authorities understand that in the long run, the country that coheres will ultimately win, because they can still work together productively).

Paul Craig Roberts, who has been one of the most eloquent in upbraiding the American rich and their useless wars and idiotic policies (see this)—even Roberts cannot let go of his Reaganism (he was a Treasury official under Reagan) and admit that tax rates are too low on the ultra-rich.

The administration seems to understand all this. Shared sacrifice has been one of their themes from the beginning. They would like to leave the Bush tax breaks on the middle class in place and raise taxes on the top few percent. I just don’t think the ruling class will stand for it. And another nail will be driven into the coffin of the American social contract.

Ultra-Rich in Finance Are Meaner Than Rest of Us: Matthew Lynn

By Matthew Lynn - Sep 6, 2010

Bloomberg Opinion

There is something surprising about a private banker warning his colleagues about the rich. It would be like a director of Volkswagen AG casting doubt on motorists, or the boss of McDonald’s Corp. distancing himself from people who eat fast food. Rather like valets, the main aim of the private banker is to court the wealthy.

At a conference in Zurich last week, the head of Barclays Wealth Management’s private-banking unit, Gerard Aquilina, appeared to issue a red alert about the richest of clients.

“Beware of the complexities of dealing with ultra high net worths,” Aquilina told his audience. “Demanding and often unreasonable” requests from them may create “impossible demands on the organization.”

Such as? Help with getting children into the right school, securing credit to buy property, or obtaining last-minute concert tickets, for example. Even worse, the richest of the rich turn out to be pretty stingy as well. They don’t even want to pay the full fee for all the services they demand.

It was strong stuff. But it was also an insight into the way the rich have changed over the past decade. They are, it turns out, a nasty bunch of people who are only getting nastier. And the banking industry only has itself to blame. […]

Friday, September 3, 2010

If there is any relation between mean duration of unemployment and the subsequent drop in the unemployment rate, we are in for a very slow decline (if any) in the unemployment rate:

The following charts show the relationship between mean duration of unemployment and unemployment rate a year later, showing that the relationship has changed in this recession:

Using the fitted equation for the period 2007:1 to August 2010, we have a forecasted unemployment rate of 7.5 percent in August 2011. This depends on a big ceteris paribus (other things equal) assumption about civilian labor force participation rate and other factors behaving the same in the recovery as in the recession. If we use the line fitted to the whole sample, the forecasted unemployment rate is 10.2 percent, with a looser fit.

So let us assume unemployment remains unchanged for the next year. What does that do to “animal spirits”? We are interested because the distinguishing characteristic of an NBER-defined slump or a business slump as understood by any practical person is the associated failure of confidence; which, as Keynes pointed out, is a palpable entity to the practical person that is adequately proxied by survey measures. And visual examination of the record (below) shows that every recession has been accompanied one-to-one by a failure of confidence as measured by the venerable Michigan sentiment series, and our measure, A. I have assumed

Regular readers will recall that our proxy for the determinants of confidence is the relation of the unemployment rate to an adaptation level:

A = - (U – UMEAN)/sigma(U)

where A is “animal spirits.”

We are still not close to a failure of confidence; which is not to say the economy isn’t in an over-indebtedness-induced “underemployment equilibrium” exacerbated by a highly unequal distribution of income and wealth. The next failure of confidence will probably not occur until about 2013. For this forecast I assume the unemployment rate will fall for a year, stabilize, and begin to rise again:

If we assume the unemployment rate remains constant for two years and then begins to rise after the next Presidential election, we have this picture:

In the case above confidence never recovers to “positive” levels, but adaptation level effects are evident in that, even as unemployment rises to new highs, the plunge in confidence is not worse than before. Plus ça change, plus c'est la même chose….

With regard to Hussman’s views on the yield curve noted recently, the 1/10 yield curve is still 2.5+ percent positively sloped, so any logistic yield curve model will still show very low recession probability (ours, of course, also utilizes the A variable; and in any event the effect of ZIRP will not be a distortive on the 1/10 curve as on the 3-month; and changes in the slope are still highly indicative):

The shape of the current cycle resembles the 1970-1974 abortive recovery, only worse.

At some point I will write up some insights on “America on the hedonic treadmill” and the adaptive necessity of resetting adaptation level “set points” to survive what’s coming, but everybody already knows that we’re going to have to get by with less. The primary contribution today is to put the current cycle in context along the most important dimension, that of “animal spirits” or confidence. The next collapse is still a ways off.